Should you save cash or invest?

Over the 20-year period from 2006 to end of 2025, holding money in a savings account or in bonds would have produced different returns to investing in shares. The below graph and table show the returns you would have earned over this period from depositing £20,000 in a savings account, or in bonds compared to investing in global shares.

Generally, cash savings are appropriate for goals that are less than five years away – maybe you’re saving for a house deposit or are planning to get married, for example. Crucially, while cash can provide peace of mind that the balance of your savings account won't suddenly fall just when you need it, which is important if you don’t have much time to wait for it to recover – it can also decline heavily in real terms, so make sure you’re aware of the impact that interest rates and inflation can have on your cash savings.

It’s worth having some cash savings for a rainy day - when life presents an unexpected expense or your circumstances change and you need to access money quickly. The amount you’ll need will depend on you and your circumstances – consider factors such as what your monthly outgoings are; whether you’re the sole earner in the household; how long you think it would take to find a new job if you were to lose yours. For one person, having three months’ salary will be enough but someone else might feel more comfortable with a year’s salary.

Many savings accounts allow you to take money out whenever you want, though some don’t permit withdrawals for a certain period of time. These tend to be the accounts that pay the highest rates of interest so this is worth bearing in mind when comparing savings rates.

Once you’ve built up your rainy-day savings and have enough to cover those short-term goals, you might then want to consider investing because while low risk, cash is by no means risk-free. You won’t lose money in cash but it often struggles to keep up with inflation so your spending power can fall over time.

Investment returns won’t necessarily beat inflation, but over time they should give you a better chance of keeping pace with it.

However, before you commit your money to the stock markets, there are a few other things to consider. While you don’t necessarily have to be debt-free, you’re probably not ready to invest if you've got money outstanding on credit cards and loans or are regularly overdrawn so look to pay those down first.

How much cash should you hold?

If you’re planning your finances for the longer term – five years or more – investing offers the chance to get your money working harder because you should get better returns than you could from cash.

There will be periods when the stock markets fall, but there will also be periods when they’ll rise. The longer you keep your money invested, the more time it has to grow which reduces the risk of your investment falling in value.

It’s therefore worth considering for financial goals that are some way off, such as retirement and children’s education costs. And even if you don’t have a specific goal, investing can help in terms of building your wealth to provide you with greater financial security.

However, investing can feel daunting particularly in times of uncertainty. It’s totally understandable to feel nervous, but when it comes to investing, it’s important to remember that the reason for doing it is to help your money grow over the long term. Therefore, try not to worry too much about what might happen in the near future.

Shares explained

As well as time being a key factor, diversification is also important when it comes to investing.

When starting out, it’s common for people to buy shares in a single company. However, this is quite a high-risk strategy because your fortunes are dependent on the performance of that one company. It’s therefore important to diversify and spread your money between different companies, sectors, geographical regions, and also different asset classes. That way, even if one company doesn’t perform very well, others will be doing okay. While not eradicating the risk completely, diversification can reduce the chances of you losing money.

You can do this yourself by buying different shares and bonds, but a simpler way is to invest in a fund, where your money is pooled with that of other investors and invested in multiple companies.